Chapter 4: The Efficient Market Hypothesis

“World domination is such an ugly phrase. I prefer to call it world optimisation.”

Gringotts Bank turned out to be an imposing multistoried building made of snow-white marble. It was located partway down Diagon Alley, near an intersection with something called Knockturn Alley, and towered over the neighbouring shops. Its architecture seemed subtly different than the “muggle” British buildings the wizarding world seemed to mimic, but Harry had never studied architecture enough to pinpoint how.

He was also too distracted by the pair of goblins standing at the bank’s ornate double doors.

They were dressed in perfectly tailored uniforms of scarlet and gold, and discreetly examined everyone that walked by the bank. Harry knew they were goblins the way he’d have known a dragon if he saw one: they matched the description of countless fantasy novels in most metrics, if not all. Far from green skinned, the short humanoids were almost as pale as the marble behind them, but they had elongated, pointed nose and ears, extremely long, dextrous looking fingers, and slanted, piercing eyes.

Harry tried not to stare as he and Professor McGonagall approached the stairs leading up to the door. It took all his self control to keep his questions to himself, however: here were living beings, apparently just as sapient as humans, but clearly from a drastically different genealogy! He wondered how much their DNA resembled humans, and if the two species were close enough genetically to interbreed. A handful of goblin bones would probably drive Richard Dawkins into an academic frenzy, let alone sight of the real thing.

Above the great double doors was a gold and mahogany plaque bearing the symbol of an ornate key, the word “Gringotts” inscribed on it. Below that were the words Fortius Quo Fidelius.Harry consulted his scattered Latin; Stronger Through Loyalty?

“Good morning,” he said to the goblins, who bowed in response. The doors appeared to be thick, heavy marble, but one of the goblins gripped its lower handle and swung it open with ease, though he appeared no more muscular than Harry. Mental note: size does not correlate with strength in the magical world.

Harry and Professor McGonagall walked through the doors side by side, and the goblin behind them closed it. They were in a small entrance hall that was mostly empty, though curiously there were a pair of fireplaces to either side. In front of them was another set of doors, these silver, also flanked with goblins. As Harry approached, he saw writing engraved on it:

Enter, stranger, but take heedOf what awaits the sin of greedFor those who take, but do not earn,Must pay most dearly in their turn.So if you seek beneath our floorsA treasure that was never yours,Thief, you have been warned, bewareOf finding more than treasure there.

Harry swallowed. It should have seemed silly, something out of a nursery tale… but standing in what seemed literally a goblin stronghold, the words conveyed a quiet, self-assured threat that sent a shiver up Harry’s spine. Further note: do not get on a goblin’s bad side.

“Greetings Madame McGonagall,” said the goblin to their right, voice reedy and accented with a dialect Harry had never heard before. “Greetings Master Potter.”

“I informed the bank that we would be arriving today, so they would have your family vault key readily located,” she explained. “It hasn’t been accessed in a decade.”

“Ah. Well, thank you for keeping my inheritance safe for me,” Harry told the goblin. He felt rather awkward claiming money from parents he had never met, but knew he would need it for school supplies that were sure to be very expensive. How much would a genuine magic item go for in the muggle world? People already paid exorbitant prices on claptrap that didn’t even work; the tooth cleaning potion he’d seen in a shop window would probably sell for hundreds of pounds, maybe thousands. He hoped he would be able to afford his wand and books at least.

“Merely our duty, Master Potter,” the goblin said, and bowed again. Was it Harry’s imagination, or was there a slightly mocking tone to the goblin’s words?

The goblin opened the door, revealing a long hall filled with goblins and wizards. The latter mostly stood in queues, while the former walked about with an air of urgent business or stood behind podiums and desks that placed them a head above their clients. A rather obvious bit of over-compensation, but Harry didn’t blame them in the slightest.

All this Harry saw through what appeared to be a thin film of water, falling gently from somewhere above the other side of the doors and trickling into a narrow grate on the floor.

“It’s called the Thief’s Downfall,” Professor McGonagall said, seeing Harry’s hesitation. “It washes away many forms of magical disguise, and will ensure we are who we appear to be. Your scar will become visible after we pass through, but I’ll obscure it again when we leave.” The witch walked through the water, then turned to wait for him.

Harry took a breath and stepped through, eyes shut and shoulders tight as he anticipated a cold bath. The water was lukewarm however, and quickly evaporated. Within seconds he felt completely dry, and he opened his eyes in astonishment, hands running through his hair.

Professor McGonagall gave him a brief smile, then led the way to a podium labeled “Special Appointments.” Harry followed, trying not to stare at any one thing too long. He saw a witch weighing a jingling pouch in her hand, goblins writing on long sheets of parchment with feathered quills, and a wizard handing an emerald the size of Harry’s fist to his goblin teller, who took out a monocle and examined the gem.

The goblin they approached seemed older than the others, head mostly bald and hair long and white, with small spectacles perched on his long nose. “Yes?” he asked without glancing up from the parchment he was examining.

“Harry Potter is here to access his vault.”

There was a slight pause, and the goblin’s eyes flicked upward at Harry. “You have the key?”

Professor McGonagall pulled an iron key out of her sleeve, the letter P engraved at its handle. She held it over the desk.

The older goblin took the key, squinting at it for a moment and running his thin fingers over the engraving before handing it back. “Very good.” The goblin reached to the side and picked up a bell, which he rang in a deliberate pattern: ding-a-dong, ding-ding, dong-ding! “Griphook will guide you.” He rolled his parchment up a bit and continued reading. Harry saw that it extended all the way down to the floor. He wondered why a society that clearly had access to books would still use scrolls. Perhaps it was a goblin thing, along with their aversion to fountain pens.

Griphook proved to be a youngish goblin, with relatively smooth skin and full dark hair slicked back over his head. He bowed after approaching them. “Madame McGonagall. Master Potter. Follow me, please.”

The goblin led them out of the main hall through a side door, which opened into a downward staircase. The stairs were clean white marble at first, but soon changed to dark stone, and the glowing chandeliers gave way to flaming torches. Harry knew they must have been enchanted, as there was no smoke, which would have filled the tunnel without some airway to escape through.

I’m walking down a goblin tunnel, Harry thought with a renewed touch of unreality. The tunnel soon leveled off, and then the walls fell away to reveal long, twisting paths with rail tracks along the floor. Mine carts sat on short tracks that branched off the main lines, and Griphook led them to one.

“Please step aboard, Master Potter.”

Harry met the goblin’s gaze. “Mister will suffice, thank you.” Harry remembered vacationing with his parents at an expensive hotel once. They’d been waited on by the staff with an overwhelming deference that was enjoyable, but in an occasionally uncomfortable way. Though the thought of having servants (or better yet, minions) was appealing on a number of levels, he didn’t quite feel comfortable being called “master” by another race. Especially not coupled with the vaguely mocking tone he sensed from the goblins, though perhaps that was merely a difference in mannerisms or accent that didn’t quite translate well. “And my full name is Potter-Evans-Verres.”

The goblin peered back at him for a silent moment, then another. Harry didn’t drop his gaze, and the goblin finally inclined his head briefly. “As you say, Mr. Potter-Evans-Verres.”

Harry followed Professor McGonagall onto the trolley, ignoring her speculative look. He noted the lack of hand rails or seat belts, and began to feel nervous as Griphook stepped in and closed the side hatch. “Is this really the safest way to conduct a banking transaction?”

“No,” Griphook said with a wide grin, revealing sharp teeth. He pulled a key out of his vest pocket, identical to the one Professor McGonagall had, and inserted it into a keyhole at the back of the trolley. “But then, it wouldn’t be much good if it was.” He twisted the key, and the mine cart shuddered, rolled slowly onto the main track…

…then shotforward at what only felt like roughly 72% the speed of sound.

Harry’s yell of surprise was soon lost behind them as the wind whipped it from his lips, and he gripped the sides of the cart until his knuckles turned white. He gave Professor McGonagall an accusatory glare, and the witch merely raised an eyebrow, arms crossed nonchalantly over her chest as her lips twitched at the corners. Harry grit his teeth and slowly drew his hands back to his sides, ignoring the lurching sensations in his stomach as the cart rocketed through the twisting caverns, down, down, down.

Of course, they’d assure it’s safe if you have the proper means to travel it, Harry chided himself. They passed by glittering crystal outgrowths, various sized vault doors, and through another Thief’s Downfall, this one much bigger and ice cold, though he once again dried in seconds.

Harry raised his voice over the clatter of the wheels. “Do all wizards keep their money here?”

“All that care about their gold!” Griphook replied.

“Gold?”

“And silver, and bronze!” Professor McGonagall called out. “The gold coins are called Galleons, the silver Sickles, and the bronze Knuts. It’s twenty-nine Knuts to a Sickle, seventeen Sickles to a Galleon!”

Harry was still processing the implications of this as they shot around a particularly wide corner, and his next question was interrupted by a burst of fire that illuminated the darkness around them. Harry twisted his head around, but the chamber was already out of sight. “What was that?” he yelled back at Griphook.

“Just a dragon!” Griphook said with a smirk, and Harry couldn’t tell if he was joking or not. His mind raced in a whole new direction, monetary matters temporarily tabled.

Soon after, the cart began to slow, its deafening rattle quieting little by little until it finally took one of the branching paths. The trolley coasted along it and reached a relatively small vault door with no markings on it. Griphook hopped out of the cart and walked up to the door, then inserted the same key he’d put into the trolley cart. A second keyhole was parallel to it, and Professor McGonagall inserted her, or rather Harry’s, key into that one. They twisted together, there was a heavy metal clunk, and the door swung inward.

Harry stepped inside the brightly lit marble room and felt his jaw unhinge in a gape.

Heaps of gold Galleons. Stacks of silver Sickles. Piles of bronze Knuts. More money than he’d ever seen in one place, all in the form of gleaming treasure that would make Bluebeard jealous.This… is all mine?

Harry was vaguely aware of Professor McGonagall leaning casually against the wall, eyes intent. Watching him. Well, that made sense. Being plopped in front of a giant heap of gold coins was a test of character so pure it was archetypal.

Harry closed his mouth. First things first… get an estimate of how much money he was actually looking at, in a way he could understand. “Are these coins the pure metal?” he asked Griphook.

“What?” the goblin spat from the doorway, voice harsh. “Are you questioning the integrity of Gringotts, Mr. Potter-Evans-Verres?”

“No,” said Harry, “not at all, sorry if that came out wrong, sir. I just have no idea at all how your financial system works. I’m asking if Galleons in general are made of pure gold.”

“Of course,” said Griphook.

“And can anyone coin them, or are they issued by a monopoly that collects seigniorage?”

Griphook grinned. “Only a fool would trust any but goblin coin!”

“In other words,” Harry said, “the coins aren’t supposed to be worth any more than the metal making them up?”

Griphook stared at Harry. Professor McGonagall looked bemused.

“I mean, suppose I came in here with a ton of silver. Could I get a ton of Sickles made from it?”

“For a fee, Mr. Potter-Evans-Verres.” The goblin watched him with glittering eyes. “For a certain fee. Where would you find a ton of silver, I wonder?”

“I was speaking hypothetically,” Harry said. For now, at any rate. “So… how much would you charge in fees, as a fraction of the whole weight?”

Griphook’s eyes were intent. “I would have to consult my superiors…”

“Give me a wild guess. I won’t hold Gringotts to it.”

“A twentieth part of the metal would well pay for the coining.”

Harry nodded. “Thank you very much, Mr. Griphook.”

So not only is the wizarding economy almost completely decoupled from the Muggle economy, no one here has ever heard of arbitrage. The larger Muggle economy had a fluctuating trading range of gold to silver, so every time the Muggle gold-to-silver ratio got more than 5% away from the weight of seventeen Sickles to one Galleon, either gold or silver should have drained from the wizarding economy until it became impossible to maintain the exchange rate. Bring in a ton of silver, change to Sickles (and pay 5%), change the Sickles for Galleons, take the gold to the Muggle world, exchange it for more silver than you started with, and repeat.

Wasn’t the Muggle gold to silver ratio somewhere around fifty to one? Harry didn’t think it was seventeen, anyway. And it looked like the silver coins were actually smaller than the gold coins.

Then again, Harry was standing in a bank that literally stored your money in vaults guarded by dragons, where you had to go in and take coins out of your vault whenever you wanted to spend money. The finer points of arbitraging away market inefficiencies might well be lost on them. He’d be tempted to make snide remarks about the crudity of their financial system…

But the sad thing is, their way might actually be better.

On the other hand, one competent hedge fundie could probably own the whole wizarding world within a week. Harry filed away this notion in case he ever ran out of money, or had a week free.

Meanwhile, the giant heaps of gold coins within the Potter vault ought to suit his near-term requirements.

Harry stepped forward, and began picking up gold coins with one hand and dumping them into the other.

When he had reached twenty, Professor McGonagall coughed. “I think that will be more than enough to pay for your school supplies, Mr. Potter.”

“It’s a mathematical thing. Named after Enrico Fermi. A way of getting rough numbers quickly in your head…”

Twenty gold Galleons weighed a tenth of a kilogram, maybe? And gold was, what, ten thousand British pounds a kilogram? So a Galleon would be worth about fifty pounds… The mounds of gold coins looked to be about sixty coins high and twenty coins wide in either dimension of the base, and a mound was pyramidal, so it would be around one-third of the cube. Eight thousand Galleons per mound, roughly, and there were around five mounds of that size, so forty thousand Galleons or 2 million pounds sterling.

Harry smiled with a certain grim satisfaction. It was too bad that he was right in the middle of discovering the amazing new world of magic, and couldn’t take time out to explore the amazing new world of being rich, which a quick Fermi estimate said was roughly a billion times less interesting.

Still, that’s the last time I ever mow a lawn for one lousy pound.

Harry wheeled from the giant heap of money. “Pardon me for asking, Professor McGonagall, but I understand that my parents were in their twenties when they died. Is this a usual amount of money for a young couple to have in their vault, in the wizarding world?” If it was, a cup of tea probably cost five thousand pounds. Rule one of economics: you can’t eat money.

Professor McGonagall shook her head. “Your father was the last heir of an old family, Mr. Potter. It’s also possible…” The witch hesitated. “Some of this money may be from bounties placed on You-Know-Who, payable to his ki- ah, to whoever might defeat him. Or those bounties might not have been collected yet. I am not sure.”

“Interesting…” Harry said slowly. “So some of this really is, in a sense, mine. That is, earned by me. Sort of. Possibly. Even if I don’t remember the occasion.” Harry’s fingers tapped against his trouser-leg. “That makes me feel less guilty about spending a very tiny fraction of it! Don’t panic, Professor McGonagall! ”

“Mr. Potter! You are a minor, and as such, you will only be allowed to make reasonable withdrawals from -”

“I am all about reasonable! I am totally on board with fiscal prudence and impulse control! But I did see some things on the way here which would constitute sensible, grown-up purchases…”

“Yes, but -” Harry pleaded. “I’m sure that when I’m an adult I’ll want one. And I can afford one. Logically, it would make just as much sense to buy it now instead of later, and get the use of it right away. It’s the same money either way, right? I mean, I would want a good one, with lots of room inside, good enough that I wouldn’t have to just get a better one later…” Harry trailed off hopefully.

Professor McGonagall’s gaze didn’t waver. “And just what would you keep in a trunk like that, Mr. Potter -”

“Books.”

“Of course,” sighed Professor McGonagall.

“You should have told me much earlier that sort of magic item existed! And that I could afford one! Now my father and I are going to have to spend the next two days frantically hitting up all the secondhand bookshops for old textbooks, so I can have a decent science library with me at Hogwarts – and maybe a small science fiction collection, if I can assemble something decent out of the bargain bins. Or better yet, I’ll make the deal a little sweeter for you, okay? Just let me buy -”

“Mr. Potter! You think you can bribe me?”

“What? No! Not like that! I’m saying, Hogwarts can keep some of the books I bring, if you think that any of them would make good additions to the library. I’m going to be getting them cheap, and I just want to have them around somewhere or other. It’s okay to bribe people with books, right? That’s a -”

“Family tradition.”

“Yes, exactly.”

Professor McGonagall’s body seemed to slump, the shoulders lowering within her black robes. “I cannot deny the sense of your words, though I much wish I could. I will allow you to withdraw an additional hundred Galleons, Mr. Potter.” She sighed again. “I know that I shall regret this, and I am doing it anyway.”

“That’s the spirit! And does a ‘mokeskin pouch’ do what I think it does?”

“It can’t do as much as a trunk,” the witch said with visible reluctance, “but… a mokeskin pouch with a Retrieval Charm and Undetectable Extension Charm can hold a number of items until they are called forth by the one who emplaced them -”

“Yes!” Harry’s excitement made him shift from foot to foot, eyes alight. “I definitely need one of those too! Batman’s utility belt of holding! Never mind my swiss army knife, I could carry a whole tool set in there! Or books! I could have the top three books I was reading on me at all times, and just pull one out anywhere! I’ll never have to waste another minute of my life! What do you say, Professor McGonagall? It’s for the sake of children’s reading, the best of all possible causes!”

“…I suppose you may add another ten Galleons.”

“And a little spending money, like you mentioned earlier. I think I can remember seeing one or two other things I might want to store in that pouch.”

“Don’t push it, Mr. Potter.”

“But oh, Professor McGonagall, why rain on my parade? Surely this is a happy day, when I discover all things wizarding for the first time! Why act the part of the grumpy grownup when instead you could smile and remember your own innocent childhood, watching the look of delight upon my young face as I buy a few toys using an insignificant fraction of the wealth that I earned by defeating the most terrible wizard Britain has ever known, not that I’m accusing you of being ungrateful or anything, but still, what are a few toys compared to that?”

“You,” growled Professor McGonagall. There was a look on her face so fearsome and terrible that Harry squeaked and stepped back, knocking over a pile of gold coins with a great jingling noise and sprawling backwards into a heap of money. Griphook sighed and put a palm over his face. “I would be doing a great service to wizarding Britain, Mr. Potter, if I locked you in this vault and left you here.”

And they left without any more trouble.

Hey everyone. This has been a lot of fun, and the feedback has been very gratifying. I’m probably going to stop here: chapter 5 is where I felt the quality began to reflect the rest of the story, and I’d have little to add to it. I might revisit this to provide more context for certain later events (Harry shopping for his wand, for example), but in the meantime I think these chapters do the job of smoothing out the introduction of Harry Potter and the Methods of Rationality. If you somehow found yourself here while being unaware of that fanfic and want to read more, you can continue the story at hpmor.com

If you have found a spelling error, please, notify me by selecting that text and pressing Ctrl+Enter. Thank you!